Pro rata rule timing
If at the time (Let’s say March) the remaining after tax balance of the IRA is converted, leaving a zero balance in the IRA. Later in the year, a 401k rollover is conducted (let’s say September). Confirming that the pro rata rule is applied at time of conversion and not end of year. Therefore the 401k rollover after the fact does not affect the earlier conversion and therefore not requiring the pro rata rule. Thank you.
Permalink Submitted by Alan - IRA critic on Wed, 2025-08-13 12:20
This is a popular question with an unpopular answer.
The pro rata rules applied by Form 8606 are based on the IRA balances at year end in addition to distributions including conversions done any time during the year. The end result is that a 401k rollover done after the conversion and included in the 12/31 balance of the IRA will cause the conversion to be mostly taxable.
The 401k rollover could be delayed until 2026, but if the taxpayer will be doing back door Roth conversions in future years, the rollover would cause those future conversions to be taxable. To avoid this, the 401k should not be rolled over unless it is so small that it also can be converted and taxes paid. The 401k should be kept in place or rolled into a new employer’s 401k if that plan accepts rollovers.